It's beginning to feel a lot like April. In the past three days, the
Nasdaq Composite Index has fallen from 3816.82 to 3384.73, about 11%. Not since the second week in April have we seen weakness like this.
Now seems a good time to review briefly the slump that began in late March. This was, in retrospect, the time when we pricked the Nasdaq bubble that was blown from October to mid-March.
The Comp peaked March 10 at 5048.62. Then came the slide. Within five trading days, the gains of March were gone. By April 11, less than a month later, the rise in February and January was eliminated. By April 14, only a few days later, December's gains were zeroed out. In sum, the rally that took 3 1/2 months to achieve was reversed within little more than one month. As fast as the bubble was formed, it was deformed even faster.
Today, a rallying cry of "Back to November!" would hardly boost the spirits of chastened investors. It is cold comfort to say that the market drop has only returned valuations to the levels of last fall. Not everyone was in by that time, and those who were feel the pain of lost riches.
You may be asking, "Why did the market go down even faster than it went up?" Last April, analysts said that speculators and daytraders working with borrowed money were behind much of the sudden move down -- forced sellers compelled by margin calls.
True enough, but there is a simpler explanation. Think about how people enter a movie theater -- in a fairly orderly way. Now, imagine that someone stands up in the middle of the film and yells, "Fire!" They run for the exits. That is perhaps a good analogy to explain why stocks often drop faster than they rise.
It's painful for investors to see gains evaporate as they did in April and again this week. But history suggests that whining would an inappropriate response. The pain inflicted on investors by the market so far has been intense but relatively brief. There are as many definitions of a bear market as there are investors, but perhaps the best one is "a sustained period of pain." Be grateful we are not there yet.